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The Weird Wacky World of Plaintiff Litigation Taxation - Giuliani Style!

A scrap of paper with Settlement printed on it sits on top of a stack of 100 dollar bills

As numerous professional commentators have noted, the Rudy Giuliani defamation case has unique and complicated tax implications for Mr. Giuliani and the plaintiffs. 

The Problem of Double Taxation

A Georgia jury awarded former Georgia election workers Ruby Freeman and Shaye Moss a judgment of nearly $150 million in damages against Mr. Giuliani. The verdict is large by any measurement: for defamation, Ms. Freeman and Ms. Moss were awarded $16.171 million and $16.998 million, respectively, $20 million for emotional distress, and $75 million total in punitive damages.

Albeit a large sum, there is a glimmer of hope for Mr. Giuliani as it relates to the tax consequences of his newfound liability. Because Mr. Giuliani was likely engaged in his business as a lawyer for former President Trump (or another similar business pursuit), he may have a good chance of treating the nearly $150 million payment as a business expense and thus deducting it from his tax liability. Conversely, for Ms. Freeman and Ms. Moss, these large verdicts will come with equally large tax consequences. Under the Internal Revenue Code (IRC), punitive damages and certain other damages are taxable as ordinary income, even for death or severe injury. To make matters worse, in most cases, the tax on litigation settlements has no corresponding deduction for legal fees, and the recovering plaintiff is taxed on the full amount of the settlement—including monies corresponding to the plaintiff’s attorneys under a contingent fee agreement. The taxation of plaintiff litigation recoveries can be haphazard, crazy, and often punitive and unfair; there are even cases where a plaintiff’s taxes can exceed the recovery amount itself!

Many criticize this arrangement because it leads to double taxation—the plaintiff pays taxes on the full recovery amount (again, including the contingent legal fees owed to the plaintiff’s attorneys), and the attorneys are also taxed on the same funds. However, plaintiffs like Ms. Freeman and Ms. Moss would do well to remember that plaintiffs have planning options. When elected promptly (meaning before the final verdict or settlement is issued), the Plaintiff Recovery Trust (“PRT”) is well-suited to make the best of a bad tax situation.

The Banks Case

The Supreme Court of the United States addressed the issue of contingent fee double taxation in Commissioner v. Banks. There, the Court held that a plaintiff would be taxed on the full amount of his recovery (including money owed to his attorneys under a contingent-fee agreement) because the plaintiff had “complete dominion over the income in question.”1 In addressing the question of what constitutes “dominion” over income, the Court ruled that the person who “owns or controls the source of the income also controls the disposition of that which he could have received himself and diverts the payment from himself to others...”2 The Court elaborated on this, specifically putting these concepts in the context of litigation, holding that the income-generating asset is “the cause of action that derives from the plaintiff’s legal injury.”3 So long as the plaintiff maintains dominion over the income-generating asset (the lawsuit), such a plaintiff will be considered the taxpayer and double taxation will ensue.


This is where a PRT’s usefulness and tax benefits are proven. By using a PRT, plaintiffs and their attorneys avoid double taxation and benefit from several other perks afforded by a PRT. In essence, a plaintiff assigns their right and interest in the litigation, thereby giving up dominion of the income-generating asset. To learn more about PRTs, read through our article discussing PRTs in more depth.

1 Commissioner v. Banks, 543 U.S. 426, 434 (2005).

2 Id.

3 Id., at 435.

Disclosure: This content is an overview. It is not a detailed analysis and offers no legal or tax opinion on which you should solely rely. Always seek the advice of competent legal and tax advisors to review your specific facts and circumstances before making any decisions or relying on the content herein.
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